Finance
Why Investors Turn to ETFs During Times of Market Stress
Market volatility often causes investors to put pressure on their portfolios, which for U.S. investors has often meant turning to exchange-traded funds (ETFs) to renew their positions or capitalize on new ideas.
Since the pandemic, the ETF market has roughly doubled in size – as of the end of the first quarter, ETFs represented $7.1 trillion, or 13% of the US stock market and 2.8% of the US bond market, up from $3 .5 trillion in 2019, according to BlackRock.
Todd Sohn, ETF strategist at Strategas Asset Management, recently visited Yahoo Finance’s Stocks in Translation podcast and highlighted some of the pros and cons of ETFs for investors.
A key advantage for ETFs is costs: Fees charged to investors have fallen sharply in the race to zero commissions among the big brokers.
“You can buy an S&P 500 fund for 2 or 3 basis points. That’s nothing,” Sohn said.
Simply buying one share of each component of the S&P 500 would cost about $105,000. To replicate the entire index based on that of each stock weight would cost at least $15,500,000, excluding brokerage commissions, according to Yahoo Finance calculations. In contrast, an annual fee of 3 basis points – or 0.03% – on an ETF means an investor would pay $3 for every $1,000 invested.
ETFs also tap into a wide range of markets and strategies, which is essential for diversification.
Sohn emphasized that ETFs give investors “access to virtually every market around the world.”
In addition to geographic and asset class diversification, ETFs have evolved to mimic certain hedge fund strategies. So called smart beta ETFsFor example, use predetermined rules for selecting investments in a fund.
Sohn also emphasized that transparency is a key benefit, as ETFs report their holdings daily.
“I can look at the assets every day. I know what ingredients my investment contains,” Sohn said.
ETFs are similar to mutual funds, but an important distinction is intraday liquidity. ETFs can be traded all day long, while mutual funds can only be bought and sold at the end of the day.
“I can trade them all day long if I want to,” Sohn said. “Or if I’m a big investor, I can move large amounts of money into these funds.”
Many ETFs also offer significant tax benefits, which Sohn described as their “secret sauce.”
And in times of market stress and volatility, ETFs can act as ‘shock absorbers’. If an investor is concerned about a stock’s decline, Sohn explains, “he can buy an ETF of similar stocks to diversify and reduce risk.”
“ETFs have great value in volatile environments. They don’t exacerbate any market structure. They help smooth things out,” Sohn said.
On the Yahoo Finance podcast Shares in translationYahoo Finance Editor Jared Blikre cuts through the market chaos, noisy numbers and hyperbole to bring you essential conversations and insights from across the investment landscape, giving you the critical context needed to make the right decisions for your portfolio. Find more episodes on our videohub. Check your favorite streaming serviceor listen and subscribe Apple podcasts, Spotifyor wherever you find your favorite podcasts.
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